Richemont Net Up 28 Percent, Sees Strength Going Forward

Profits at Compagnie Financi?re Richemont SA surged 28 percent in the first half to 824 million euros...

Profits at Compagnie Financière Richemont SA surged 28 percent in the first half to 824 million euros, or $1.12 billion at average exchange, from 645 million euros, or $816.5 million, on the back of increasing sales and higher gross margins.

The company, which owns brands including Cartier, Van Cleef & Arpels, IWC, Chloé and Dunhill, said Friday that stripping out the profits from its 19 percent stake in British American Tobacco, the bottom line would have risen 32 percent to 490 million euros, or $667 million, from 371 million euros, or $469.6 million.

The outlook for the second half is rosy: "In the absence of any significant deterioration in debt and equity markets, I expect the group's results for the full financial year will be comfortably ahead of last year," Johann Rupert, executive chairman, said in a statement.

But the company is expecting some challenges. Although the second half has got off to a running start with sales last month rising 11 percent, Richemont acknowledged the next six months would be "more testing" because of exchange rate fluctuations. In addition, the company is up against tough comparisons with last Christmas.

But those appear to be the only hurdles: The subprime mortgage crisis in the U.S. hasn't yet made waves at Richemont, which is based outside Geneva.

In the first half, growth in the U.S. was 6 percent at actual exchange rates, and 13 percent at constant ones. "The U.S. is a small part of our business — it's 20 percent worldwide," Alan Grieve, director of corporate communications, said in a conference call. "There's still very strong demand everywhere, and strong demand for exceptional pieces. The high-end sector is probably more resilient, and there's a strong geographical spread in our business."

Grieve added: "We have a high-value, enduring product. Consumers are not buying it for a year, but for 100 years. Luxury has become more democratic on the fashion side, but most of our prices are going up. There are more rich people every day."

Sales in the six months to Sept. 30 rose 11 percent to 2.5 billion euros, or $3.4 billion, from 2.3 billion euros, or $2.91 billion, with 18 percent growth at the specialist watchmakers and 9 percent growth at the jewelry houses.Richard Lepeu, group finance director, said during the conference call that emerging markets and rich tourists were an important impetus behind sales in the first half.

"We are up 40 and 50 percent in Russia and the Middle East," he said. "In traditional Western markets, a significant part of the business is actually with foreigners from the East and the Middle East. Growth in Europe is fueled by tourism."

During the period, Richemont said there was an increase in gross margins that reflected the product and channel mix, pricing adjustments and the favorable movement in the euro versus the Swiss franc.

Separately, Richemont said it acquired one of its suppliers, the Swiss watch case manufacturer Donzé-Baume SA. The transaction was a private one. Richemont said the deal would have no material impact on the company's consolidated net assets, or on the profitability of the fiscal year ending March 31. During the conference call, Grieve called the deal "relatively small, but strategically important."

He said the acquisition would give Richemont access to an ever-dwindling pool of skilled craftsmen.

"The nature of the Swiss watchmaking industry means there's now a shortage of skilled craftsmen. Meanwhile, demand has gone very well in the past few years. There's also been a shift toward higher-value watches—people seem to want more complicated movements, and brands like Piaget are heavily into bejeweled watches," he said.

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